There’s been a bit of talk about New Zealand’s current account deficit lately e.g. (1), (2), (3) – probably because it looks like borrowing to fund the deficit is becoming much more difficult (The current account deficit is the difference between what the country earns from overseas and what it spends overseas).
New Zealand hasn’t had an annual current account surplus since 1973, and if we don’t turn things around soon it seems we may be back to the bad old days of Finance Ministers going cap-in-hand to the world’s financial centres to beg for loans, and/or facing a significant decline in the value of the New Zealand dollar. Being in such an indebted and vulnerable position undermines our economic sovereignty, as we can less and less afford to do anything that upsets our foreign moneylenders.
In the Kiwi summer DIY spirit I thought I’d offer a simple (some might even say simplistic) approach to tackling this problem…if we try it, it won’t happen overnight, but it will happen 🙂
We can see the gradually worsening trend in our current account easily if we look at a chart – this one uses data provided by the Reserve Bank.
The latest figures show the current account deficit reaching 8.6% of GDP.
Now a sensible household facing this problem would recognise that they have two options: to increase their income earned from outside the household, and/or to reduce their expenditure outside the household.
What can you do, then, as a member of ‘the New Zealand household’ to help? [I won’t focus on increasing income here – it is a harder task, and the analogy would be even more strained – but it is fair to say that ‘free trade plus building more roads’ won’t be enough]
- Spend less on overseas stuff. That’s not hard to do – oil, cars, most consumer items, holidays overseas – these are all imports. Finding ways to use the car less helps the planet by reducing carbon-emissions too. Your goal is not to stop all spending – you just aiming to reduce your contribution to imports by about 9% or 9 cents in every dollar. Buy local where you can. Take a holiday in the Bay of Islands instead of the Gold Coast.
- Delay spending on overseas stuff. Obviously, if you are going to upgrade your TV, you are not going to be able to buy Kiwi made. And you can’t buy 90% of a tv. But you can delay your purchases – stretch out the time between replacing consumer items – and that will help. Look at it this way: if you replace your computer every three years, at a cost of $3,000, then your annual expenditure is $1,000. If you hang on a bit longer and replace it after say 3 and a half years, your annual expenditure is only $857.14.
- Don’t buy consumer items on credit. This will acheive by default method 2 savings, because you’ll need to save up more. It will also help reduce imports of capital.
I’m not claiming this is a fully thought out economic policy here. My point is to try and relate that big-bad economic-thing-out-there (AKA the current account deficit) to practical decisions ordinary people can relate to. Because at bottom, this is simple: we are spending about 9 cents in every dollar too much on overseas stuff: goods, services, and the cost of borrowing money. If we make it a priority, we can do something about it.